Law Times

Page 8 March 23, 2015 • Law Times www.lawtimesnews.com Insolvency lawyers relieved at ruling on Construction Lien Act BY MICHAEL McKIERNAN For Law Times nsolvency lawyers breathed a sigh of relief when an On- tario judge confirmed trust claims made under the prov- ince's Construction Lien Act don't survive bankruptcy. A series of Supreme Court judgments made over the past four decades have established that s. 67(1)(a) of the Bankruptcy and Insolvency Act, which ex- cludes assets held in trust for an- other person from the divisible property of the estate, doesn't ap- ply to a deemed trust created by provincial statute unless it also meets the test for a valid com- mon law trust. However, the par- amountcy principle had never been tested in the context of the Construction Lien Act until last summer's decision in Royal Bank of Canada v. Atlas Block Co. Ltd. Insolvency and restructuring lawyer Sam Babe, who acted for RBC as one of the creditors of the bankrupt landscaping prod- uct manufacturer Atlas Block, says he was happy with the re- sult but always felt confident he had the weight of Supreme Court case law behind him. "I'm not sure why it took 35 years for someone to try to apply this to the [Construc- tion Lien Act], but we asked a new question that had nev- er been asked before," says Babe, a partner in the finan- cial services group at Toronto law firm Aird & Berlis LLP. "I think the result was expected because the way I thought of it was, why should this deemed trust survive bankruptcy when generally speaking provincial statu- tory trusts don't? There was no good answer to that." Ontario Superior Court Justice Michael Penny agreed, concluding "there is no apparent reason why a deemed trust under the [Construction Lien Act] should be treated differently than any other provincial statutory deemed trust for the purposes of paragraph 67(1)(a) of the [Bank- ruptcy and Insolvency Act]." David Ward, a partner in the restructuring and insolvency group at Cassels Brock & Black- well LLP in Toronto, says the de- cision was a "comforting confir- mation of the law" for Ontario's insolvency bar. "I suspect it was a less welcome surprise in the construction law bar because they have histori- cally tried to rely on the deemed- trust legislation to achieve a pri- ority in insolvency cases, and the Atlas Block case law is clear that this is not viable, which will be disappointing to them and their clients," he adds. Howard Krupat represented Atlas Block's receiver, KPMG Inc., in court and also chairs the construction and infrastructure law section of the Ontario Bar Association. He says Penny's decision has provoked a lot of discussion among some of his OBA colleagues in the construc- tion bar because it challenges some of their working assump- tions in the context of insolven- cy when dealing with payments to suppliers that would other- wise be trust beneficiaries. "It's fair to say that there was an assumption, at least from a practical perspective, that money received during a receiv- ership for the insolvent party's construction project would be set aside for suppliers and subcontractors as a trust fund under the [Construction Lien Act]," says Krupat, a partner at Davis LLP in Toronto. Atlas Block confirms that subcontractors can no longer rely on that money being avail- able, Krupat notes. "The concern expressed is that this is the type of scenario from which the [Construction Lien Act] was intended to protect subcontractors and suppliers. The debate now among the con- struction and infrastructure bar is whether that is appropriate as a matter of policy and whether leg- islative changes are needed at the provincial or federal level." The creditor at the heart of the case, Holcim (Canada) Inc., began running into difficulties with Atlas Block in mid-2013. By the time Atlas Block went into receivership in October 2013, Holcim, which had supplied the company with cement powder for its products and for resale, had gone unpaid for six months' worth of shipments with an esti- mated value of $400,000. Because Atlas Block hadn't sold all of Holcim's supplies to construction projects and given the difficulty of tracing which of its shipments had been in- corporated into particular proj- ects, the receiver argued the creditor couldn't even meet the requirements for a deemed trust claim under the Con- struction Lien Act. However, Penny ruled it was at least the- oretically possible for Holcim to prove its trust claim. "The fact that Atlas had some retail customers is not, in principle, a bar to Holcim's ability to assert a trust claim under s. 8 of the [act] over monies identifiably owed by and collected from the large, identified construction proj- ects," wrote Penny. "Whether such claims could be proved is, of course, another matter and would depend upon the sufficiency of the evidence." However, Penny's subse- quent finding that the alleged trust lacked the properties of a common law trust and there- fore didn't survive the bank- ruptcy rendered the issue moot. Penny ruled Holcim's claim failed because Atlas Block didn't segregate payments from con- struction projects for products containing its cement powder, negating the certainty of the subject matter required for es- tablishing a common law trust. Holcim argued that once the receivers arrived, they should have separated the funds subject to a Construction Lien Act trust claim because of their status as officers of the court. Penny, however, disagreed. "Although the Receiver un- doubtedly stepped into the shoes of Atlas upon its appoint- ment, Atlas . . . was under no obligation to keep the putative trust funds separate and apart from other funds received. Nor did Atlas do so. It co-mingled all funds received from sales of its products, regardless of whether they were to individu- als off the street, wholesalers, re- tailers or construction projects. The Receiver's obligations can- not exceed what the debtor was obliged to do." Sandra Astolfo, a lawyer for Holcim, says she was disap- pointed with the decision given its erosion of the "trust rights of unpaid suppliers of services and materials" under the Con- struction Lien Act in favour of secured creditors. In a decision released shortly after Atlas Block, an Alberta judge reached a similar conclu- sion to Penny on the status of a deemed trust under that prov- ince's legislation during a bank- ruptcy in Re Iona Contractors Ltd. Astolfo says she and her cli- ent are pinning their hopes on an appeal launched in that case. LT The decision challenges construction lawyers' assumptions about payments to suppliers that would otherwise be trust beneficiaries, says Howard Krupat. FOCUS ON Restructuring & Insolvency Knowledge of the vast body of debtor-creditor law translates into effective client strategies for minimizing risk and maximizing recovery. 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